Your Guide to a Qualified Personal Residence Trust in Washington, D.C.

If you are looking for help in creating a qualified personal residence trust, Kevin C. Martin, Attorney at Law, PLLC, can help you. Book an appointment today.

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Qualified Personal Residence Trust

You could end up paying hefty federal and state taxes because you underestimated the size of your estate. When you pass away, your principal or vacation home is included in your estate, like any other asset, and could be heavily taxed. However, homeowners can use a qualified personal residence trust (QPRT) as an estate planning tool to reduce their estate size and save taxes by freezing the value of their residence by transferring it into a trust.

A qualified personal residence trust offers savings on gift and estate taxes. But it can be challenging to set up and maintain. That’s where a seasoned DC trusts lawyer can step in and help you plan your estate.

 

How Does a Qualified Personal Residence Trust Work?

A QPRT is a type of irrevocable trust that allows you to withdraw your primary or secondary residence from your estate for tax-saving purposes. The property owner can continue to live in such a home with a “retained interest” in the property until a set date. After the expiry of the predetermined period, the ownership and remainder interest in the grantor’s personal residence passes to the trust’s beneficiary. 

Let’s use an example to explain how a QPRT works. For instance, you own a home worth $1.2 million that you want your child to inherit. While you are not ready to move out of your primary residence, you want a way to “freeze” the fair market value. To do this, you set up a QPRT for ten years, naming your child as the beneficiary.

Over the 10-year period of the QPRT, you, as the grantor, can continue to live in the residence with a retained interest. Additionally, you will have locked-in estate tax benefits and gift tax savings. Simply put, if the property’s value appreciates by $300,000 during the 10-year period and your home is now valued at $1.5 million then in such cases, if no QPRT had been set up, an increase in the property’s value would have led to an increase in the estate and gift taxes. But with a QPRT in place, the estate and gift tax would be calculated on $1.2 million and not $1.5 million. Thus, you can hold on to the house and reduce the impact of your property’s value appreciation for estate tax purposes.

The residence reverts to the estate if the grantor dies before QPRT’s trust period lapses. In other words, the residence then becomes part of the grantor’s estate and is taxed accordingly.

Qualified Personal Residence Trusts Guidelines

A QPRT is subject to the following guidelines:

  1. You can have term interests in only two QPRTs.
  2. Only a property classified as a qualified personal residence can fund a QPRT. The following properties can be termed as personal residences:
  • The principal residence of the grantor.
  • A home used for personal use for at least 14 days per year, or if more, for 10 percent of the rental days it receives each year.
  • An undivided fractional interest in one of the residences described above.
  1. If the grantor pays for any expenses associated with the property which the beneficiary should ideally pay, the payment may be deemed an additional taxable gift.
  2. The QPRT terminates when the property ceases to be your qualifying personal residence. However, there are some exceptions to this rule.
  3. The trust assets revert to the grantor if the QPRT lapses. Alternatively, such assets are required to be converted to a Grantor Retained Annuity Trust (GRAT) within 30 days.

These regulations on eligibility and regulations aren’t exhaustive. Consider consulting Kevin C. Martin Attorney, Attorney at Law, PLLC, for invaluable guidance on QPRTs. 

Creating a Qualified Personal Residence Trust

There are several steps involved in establishing a qualified personal residence trust, which include the following:

  1. Deciding who will serve as the initial and successor trustees.
  2. Deciding who will be your beneficiaries.
  3. Determining how long you want the right to live in the residence before it will pass to your beneficiaries.
  4. Having a lawyer draw up an irrevocable trust agreement.
  5. Transferring ownership of your residence to the QPRT.
  6. Hiring a licensed real estate appraiser to establish the fair market value of the qualified residence for gift tax purposes.
  7. Reporting the “gift” of your residence to the Internal Revenue Service (IRS).

Setting up a QPRT can be complicated. Hiring an experienced estate planning attorney from Kevin C. Martin, Attorney at Law, PLLC, may be beneficial to ensure the documents comply with legal and IRS requirements.

 

What Types of Properties Can Be Placed into a QPRT?

A Qualified Personal Residence Trust (QPRT) can include various types of properties, reducing the taxable estate for significant estate tax savings. Primary residences or vacation homes are commonly placed into a QPRT.

The property can have mortgage payments; however, this may affect the calculation of the gift value when transferring to the QPRT. Placing property into a QPRT allows homeowners to use their estate tax exemption and potentially benefit from the annual gift tax exclusion, leading to lower estate tax liability.

While there are no immediate income tax deductions or income tax consequences for transferring property into a QPRT, the significant tax savings in estate taxes can be substantial. The grantor, after transferring the property, may continue living in it by paying rent, which further reduces the estate value.

Benefits of a Qualified Personal Residence Trust

  • QPRTs help reduce the estate tax for you and the beneficiaries. They remove the principal or vacation home from the grantor’s estate, thus excluding them from taxation.
  • Property can be transferred to your beneficiaries with a reduced gift tax.
  • If you survive the trust, your property’s increase in value is removed from your estate.
  • You maintain some interest in the property as a grantor, meaning you can still use it during the trust term.
  • You can name yourself as a trustee to exert control of the property.

 

How Kevin C. Martin, Attorney at Law, PLLC Can Help You

 

A QPRT is a great estate planning tool for managing federal and state tax obligations. However, creating one and maintaining it is an uphill task. The legal complexities, time restrictions, and paperwork involved can be exhausting.

But fret not! Kevin C. Martin, Attorney at Law, PLLC, is an estate planning and probate lawyer who can help you establish a qualified personal residence trust. We can help you create and maintain the trust with minimum fuss. So don’t wait any longer to save some tax dollars! Contact us today to schedule a free consultation to assess your case!

Frequently Asked Questions

Can I Designate Multiple Beneficiaries for My QPRT?

You can name several beneficiaries in your QPRT. Usually, your spouse is the first beneficiary in your trust, followed by your children.

 

Can a QPRT Hold Cash?

QPRTs can hold cash in different accounts for:

  • Paying trust expenses.

  • Paying for property improvement or development.

  • Purchasing an initial residence.

  • Buying a replacement residence.

  • QPRTs can also hold cash for two years after a trust is sold.

It is worth noting that the cash held in these accounts needs to be spent within set timeframes. Some periods are as short as three months, while others limit you to six months.